Gone are the plain vanilla days of old fashioned mortgages; today’s mortgages have more flavors than Baskin Robbins.
One of the first decisions you will have to make is whether you want a fixed rate mortgage or an adjustable rate mortgage. A fixed rate loan will usually be at a higher rate than a variable rate loan. This is because the banks have to make up for the fact that interest rates may move against them. So they try to earn more interest at the outset.
Fixed rate mortgages typically are better since the borrower protects himself against interest rate rises. But for it to pay off, you should plan on having your home for ten or more years. If the home will only be owned for about five years, the higher rate will not amortize during the loan.
If you think you will not be in the same home for ten years or so, the adjustable rate market is probably a better choice. The monthly mortgage will be lower with an variable rate mortgage, and even though you have the risk of higher rates, you would have that when you sold the house anyway.
In addition to deciding on an ARM (adjustable rate mortgage), these days you have to decide upon the index that will be the basis for the rate adjustment mechanism, and understand the rate adjustment cap (how many times and at what maximum percentage the rate can move) as well as the maximum interest rate.
Lenders will also offer borrowers a lock in period, so it is important to know how soon you are going to be purchasing your house. The lock in period means a given rate for a fixed time. The rate on the loan will be influenced by the lock in period, since a longer lock in rate will mean a higher interest rate.
A buyer also has to choose how much to put down. Most people put down whatever they can get together to qualify for the mortgage. But some people do have additional cash, and they have to decide if other investment options would be a better use of those funds.
The next choice a borrower has to decide upon is how many points he wants to pay so that he can lower the interest rate. The length of time you will hold the loan will be an important determining factor.
Today’s mortgage borrower has a lot of issues to think about. With all of these kinds of loans, and new ones being introduced on the market almost every day, such as interest only loans and options based loans, it is no wonder today’s borrower is confused.
